Deflation, Japan Would Do Well to Look to Itself

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Last updated at: (Beijing Time) Monday, March 24, 2003

Deflation, Japan Would Do Well to Look to Itself

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Shortly after Japanese Finance Minister Masajuro Shiokawa peddled to the Group of Seven on February 22 the fallacy that China has exported deflation, a Japanese mainstream newspaper carried an article early this month levelling a similar accusation, according to an article in the China Youth Daily.

The piece carried in Japan Business News lambasted China, accusing it of "exporting continuous deflation" to other Asian countries, saying the low price and cheap labour costs of its exported products have caused the decline of incomes and assets value in Japan, leading to the proliferation of its deflation.

Earlier, on January 28, the Japanese Yomiuri Shimbun also published an article claiming China's export growth had, to some extent, aggravated Japanese domestic deflation.

This uproar in some quarters of the Japanese media has been echoed by some of its officials.

Early this month, a Japanese senator made accusatory remarks concerning China's currency policy. He said China should appreciate its currency to ease the negative impact caused by its alleged export of deflation upon the Japanese economy and the world as a whole.

Just prior to this year's assembly attended by financial ministers of the Group of Seven in Paris, Japanese Finance Minister Masajuro Shiokawa repeatedly asserted that he would push together with his Western counterparts for an agreement to oppose deflation worldwide and force China into appreciating its currency.

He also criticized and protested against China's currency policy at the meeting, saying China has continuously exported its low-priced products to Japan, which served as the main reason for Japanese deflation.

Such accusations by the Japanese Government are groundless, argued the China Youth Daily article. Furthermore, the Japanese Government has never had any communications with official Chinese channels on this issue, direct or indirect, according to insiders from the People's Bank of China, the country's central bank.

The allegations are purely a unilateral act on the part of Japan in attempting to exert pressure on China through the international community and are utterly incompatible with the principle of developing friendly relations between the two neighbours, the China Youth Daily article said.

These unfounded accusations have done nothing conducive to, but only further sabotaged, Sino-Japanese bilateral relations.

As the world's second largest economy, Japan adopted a precautionary psychology against its neighbours - Southeast Asian countries, China, and the Republic of Korea (ROK) - during the 1997 Asian financial crisis.

Not only did it shirk its responsibilities in maintaining stability of its exchange rate as the world's second largest economy, it immediately depreciated its currency following the outbreak of the crisis.

Such a move, taken by the Japanese Government, gave rise to a dramatic increase of its exports, but it also further exacerbated economic conditions in crisis-stricken Southeast Asian nations, such as Thailand, Indonesia and others.

In the event, Japan paid a heavy price for its own short-sighted policy, according to the article.

Since the 1997 economic crisis, Japan's reputation among Southeast Asian countries has declined, forcing a number of its own businesses to move out of this region and into China where development prospects look much rosier.

During the Asian economic crisis, Japan, on the one hand, urged China to maintain a stable currency. On the other, however, it retained and fostered an unhealthy mindset towards its neighbour's stable currency policy.

Essentially, it expected China, by means of maintaining the stability of its currency exchange rate, to partly shoulder the risk and losses of the economic crisis.

At the time of the crisis, the Chinese Government gained a good reputation for being a responsible economy in Southeast Asia.

China firmly expressed, on many occasions, its determination to maintain stability of its currency.

And beyond the expectations of Japan, China overcame various difficulties to successfully realize the soft landing of its economy, in spite of the enormous economic losses it suffered during this crisis. These measures effectively curbed inflation, and maintained stability of its currency.

In the late 1990s, Japan once again lashed out at China's currency policy, this time calling upon its neighbour to appreciate its currency, said the article.

Over the past three years, Japan has not ceased its exaggeration of the impact of China's exported commodities upon its market, and no doubt it will continue to sing the same old tune in the future, said Yuan Yuedong, a senior expert on the Japanese economy at the People's Bank of China.

According to Yuan, deflation has become a headache for the Japanese Government.

But its root cause is attributable to the country's sluggish economic structural adjustment, rapid movement of its traditional industries outwards, and the unsatisfactory development of newly-emerging industries, said the article.

In the absence of an effective means for solving its domestic problems, Japan attempted to find a scapegoat from outside for its domestic troubles. And China, which has experienced more than 20 years of rapid economic development, was the obvious candidate, Yuan said.

It is a fact that the inexpensive but quality Chinese products exported to Japan have been widely welcomed by the ordinary Japanese consumer, although the made-in-China wares do curb, to some extent, the price of Japanese manufactured products.

But the problem is the Japanese Government has excessively exaggerated the role of cheaper imports, argued Yuan.

What lies behind this attitude is the fact that certain Japanese conservatives are simply unwilling to accept China's booming development and its surging export volume, he added.

Japan needs to adjust its own psychology and face up to China's remarkable economic success, particularly as China's development, far from posing a threat, affords an opportunity for Japan's development.

To prescribe a good medicine for its protracted economic slump, Japan should probe into its internal contradictions.

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